Outsourcing: The outside caterers are truly on a roll

THE virtual company is not a theory, nor a forecast. It has been with us for several years. Companies of substance have been shrinking.

Airlines such as British Airways lease aircraft complete with crew, hand catering over to a specialist organisation, have their accounts and computer operations organised by somebody else, and sub-contract booking to travel agents.

Manufacturers buy in research from laboratories, sub-contract manufacturing, hand over transport to specialists. Banks like Abbey National hand over their claims management and call centres to outsourcing companies.

Outsourcing, sub-contracting, partnering, facilities management, joint ventures, contracting out - they are all variants of the same thing: moving a function out to an external specialist.

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It has become so popular and grown so fast for the past decade that if it is a management fad the time must be approaching for the pendulum to swing back the other way and the fashion to grow for bringing everything under the companies' direct control.

Rod Aldridge of Capita reckons the trend at the moment is just the opposite. The commercial logic of outsourcing is still causing the practice to spread, and the industry is worth at least £30 billion, excluding some central government functions. He estimates that it is growing at between 20pc and 30pc a year.

Brian Staples of Amey said a huge extra fillip could be given by the Labour manifesto, which promises a big increase in outsourced work from all areas of central and local government.

"There has been a lot of noise about it" in the past, but so far it had only just started.

Now the Labour party has spelled the rules and preferences out more clearly so Mr Staples expects a steady build-up during the life of the next parliament. There is practically nothing that cannot be outsourced or handed over to a facilities management specialist - and is.

Catering, security and cleaning are old traditions in this area, as is the transport fleet. Then came an increasing part of the manufacturing, the computer department, accounts, and even sales.

Mr Aldridge said the outsourcers are now coming into the contract larger and earlier. "Things would once have been set up in-house" and then outsourced, but he is now getting involved in contracts which cover everything from sorting out the systems, writing the software, organising call centres, refurbishing buildings and hiring staff.

One reason for that may be the difficulty of shifting out an already existing department. The Transfer of Undertakings (Protection of Employment) Regulations, generally referred to as Tupe, made reorganisation of that type a costly problem.

Tupe ensures that not only jobs but terms of employment are protected if a function is shifted to an outside contractor. Since one of the reasons for outsourcing is to get greater efficiency and the benefits of scale, this puts a crimp in the contractors' ability to deliver savings.

That has not been helped by the courts. Pauline McArdle of legal firm Denton Wilde Sapte said: "The law is such a mess there are always plenty of cases."

That merely adds to the confusion, however, because the UK courts interpret the law much more in employees' favour that do their European counterparts.

"It's most unsatisfactory," she said, and needs quite a lot of attention to sort it out. It does not seem to have stopped the trend, with everything being shifted out except the core activities.

What is the core and therefore gets left behind is getting trickier to decide - for some it is the board of directors and the customer lists. If Price, of Sheffield Hallam University, said it was only "business-critical activities" that had to be retained, like servicing the aircraft for British Airways.

The criterion is relatively simple for judging, he added. "Economic logic says you outsource when internal co-ordination costs exceed transaction costs." He warned that transaction costs are falling.